Sichuan Changhong's decline: "bad debts + gambles" led to its downfall. How long can it survive on subsidies?

As the former leader of the color TV industry, Sichuan Changhong has been very upset in recent years. In an era of rapid technological change, it seems to have lost its way and its performance has continued to be sluggish. In 2015, Changhong once suffered a huge loss of 1.974 billion, which was shocking. Although the performance rebounded rapidly in 2016, according to the latest third quarter report of 2017, the company's net profit after deducting non-operating items was a loss of 75.76 million yuan, and it is worrying whether it can make a profit for the whole year. Why did the former home appliance giant step by step into the quagmire of performance and find it difficult to extricate itself? As a former user of Changhong TV, Guanchajun will sort out the cause and effect for everyone.

The decline of the former household appliance giant

Changhong, which started out as a military company, has experienced a golden period of development since its listing in 1994. It has become one of the giants of home appliances and was once on par with Qingdao Haier. But now, it is getting further and further away from the latter. As mentioned earlier, Sichuan Changhong lost 75.76 million yuan after deducting non-operating expenses in the third quarter of 2017, while Qingdao Haier made a profit of 4.965 billion yuan after deducting non-operating expenses in the same period. Changhong's current market value is 18 billion yuan, while Haier has already exceeded 100 billion yuan, which is a world of difference. Hisense Electric, which also mainly produces televisions, still made a profit of 485 million yuan in the third quarter after deducting non-operating expenses, with a market value of 21.3 billion yuan, which is also far better than Changhong.

Once upon a time, everyone stood at the same starting line, why is the gap so big now?

There are two landmark events in Changhong's downfall: one is the huge bad debt with the American company APEX, which seriously damaged Changhong's vitality; the other is the strategic mistake of investing huge amount of money in plasma TV project, which was abandoned by the market.

The dispute with APEX occurred during Changhong's heyday. In early 2001, Changhong, which had excess production capacity, began to implement the "big market, big foreign trade" strategy, and selected the United States as its main sales market and APEX as its partner, conducting trade in the United States on credit.

However, after Changhong provided products to APEX, its accounts receivable increased dramatically. At the beginning of 2001, Changhong's accounts receivable were 1.82 billion yuan. By the end of the year, this figure increased to 2.88 billion yuan, an increase of 58.2%. By the end of 2003, Changhong's accounts receivable had reached 4.98 billion yuan, of which APEX owed 4.45 billion yuan. At the end of 2004, Changhong announced that "the US importer APEX has suffered a large loss due to factors such as patent fees, US anti-dumping against Chinese color TVs, and poor management, and has great difficulty in paying the company's debts," exposing this astonishing amount of bad debts to the outside world.

According to Changhong's 2004 annual report, this bad debt caused Changhong to lose 3.681 billion yuan that year. That was the year when Ni Runfeng resigned as Changhong's chairman and was succeeded by the current chairman Zhao Yong. If APEX, the "pig teammate", was to blame for the huge losses in the past, then Changhong's management team was undoubtedly responsible for the strategic mistakes that followed.

At that time, the color TV industry was facing a crossroads in upgrading from cathode ray tube (CRT) to plasma and LCD TVs.

In 2006, Zhao Yong officially announced at the Sichuan Provincial "Industrial Powerful Province Conference" that Changhong's investment direction was determined to be plasma screens. In the same year, Changhong spent 2 billion US dollars to acquire South Korea's Orion Plasma Company, and then invested 720 million yuan to establish Sichuan Hongou Display Devices Co., Ltd., which mainly produces plasma panels.

However, everyone knows what happened next: the market eventually chose LCD screens.

By the end of 2013, Changhong's investment in Hongou reached 1.72 billion yuan, but it suffered losses year after year. In 2014, Changhong finally lost its patience and announced that it would sell 61.48% of Hongou's shares for 64.2 million yuan. Thus, Changhong's gamble ended in complete failure. By this time, Changhong had invested more than 4 billion yuan in the plasma project.

It can be seen that Changhong’s decline is not only because it encountered “bad teammates” in the front, but also because it has a “blind” management team in the back. What a miserable life!

Blind diversification: Artificial intelligence can hardly support future performance

After the plasma project ended in failure, Changhong's revival in the TV market was basically hopeless. However, as 2014 began, the wave of networking and intelligence began to sweep the home appliance industry. Major home appliance companies concentrated on transforming to intelligence. Haier, Midea, and Gree, the three giants, also successively launched their intelligence strategies and established their own intelligent ecosystems; Internet companies such as Alibaba, Xiaomi, Suning and other Internet giants and retail giants also joined the battlefield.

For Sichuan Changhong, this is another opportunity for revival, but it is not optimistic whether it can "overtake on the curve". The fundamental reason is that after losing its hegemony in the TV market, Changhong has long lacked its own core products and its diversified development is too blind.

In fact, Changhong has already started the road of diversification, such as batteries, air conditioners, and even entered the mobile phone and IT product industries in 2005. After 2008, it even entered the hot real estate industry. In 2017, Changhong's road to diversification is still continuing. According to the 2017 semi-annual report, Changhong launched smart home application solutions, achieved breakthroughs in five business directions including intelligent control, security, big media, energy, and health, and achieved large-scale market sales.

Energy? Health? Is Changhong strong in these two areas? In my humble opinion, such a comprehensive approach is really not suitable for Changhong now.

2017 Semi-annual Report Main Business - By Product Classification

In addition, according to the company's semi-annual report in 2017, among Changhong's main products, intermediate products had the largest turnover, which was 8.48 billion yuan, followed by IT products, which was 8.41 billion yuan. The operating income of white appliances and black appliances was 7.8 billion yuan and 6.4 billion yuan respectively. Among them, the operating income of batteries, set-top boxes, and communication products in black appliances was 530 million yuan, 440 million yuan, and 100 million yuan respectively. In addition, the transportation processing industry and real estate contributed 480 million yuan and 300 million yuan in operating income to the company respectively. From the above data, it can also be found that although Changhong has a large business now, it does not have core competitiveness.

On the other hand, Haier, mentioned above, has been focusing on the production of home appliances and has rarely involved in other fields. According to its 2017 semi-annual report, the turnover of Haier refrigerators is much higher than that of other products. This is its flagship product with core competitiveness. The same is true for Hisense Electric, whose main product is only televisions, but its performance is "better than" Changhong.

If Changhong has a bright spot, it is that it started early in the field of artificial intelligence. In 2012, Changhong began basic research on related technologies, and in 2016 it took the lead in launching the world's first artificial intelligence TV. But at present, its competitors such as Hisense, TCL, and Skyworth have also quickly followed suit. Although it started early, Changhong did not show a clear advantage in the field of artificial intelligence TVs, and the launch of artificial intelligence TVs only improved its performance in 2016. After entering 2017, it showed signs of fatigue and once again sounded the alarm for losses.

Although the early bird catches the worm, if its wings are not strong enough and it lacks core skills, it will ultimately be unable to catch the eagle.

How long can you survive by losing money but gaining publicity and relying on subsidies?

In fact, judging from the financial statements, Changhong's turnover is on the rise this year. In the first three quarters, the company's operating income increased by 12% year-on-year to 54.4 billion yuan. However, net profit fell by 68% to 160 million yuan, and after deducting non-operating income, the loss was 75.76 million yuan.

Why did the net profit decrease significantly despite the increase in business? Is it because they are losing money to gain publicity?

Changhong did not give a clear explanation in the third quarter report. However, according to its semi-annual report, the reasons for the decline in profits include the rapid rise in the prices of bulk materials such as copper, steel, and panels, which squeezed the profit margins of related industries to a certain extent, and the profit of refrigerator (freezer) business decreased year-on-year; the impact of the settlement time of commercial projects led to a year-on-year decrease in the profit of the real estate business of 200 million yuan; changes in the Indian market environment led to a decrease in the scale of set-top box shipments, etc.

According to the third quarter report, Changhong obviously received a lot of "extra money" to achieve a net profit of 160 million yuan. This is the 130 million yuan and 140 million yuan that Changhong received from the disposal of non-current assets and government subsidies. After deducting these two huge amounts of money, it is natural that Changhong turned from profit to loss.

In fact, as early as 2014 and 2015, Changhong suffered losses of 1.68 billion yuan and 480 million yuan respectively after deducting non-operating expenses. If it had not received subsidies of 260 million yuan and 240 million yuan, it would probably have been in bankruptcy at that time.

It can be seen that the data on Changhong's books in recent years has largely relied on government subsidies. However, this is not a long-term solution. How can the former color TV leader put his face if he relies on government subsidies to survive? However, this is the fact.

Originally, Changhong's performance improved in 2016, but unfortunately, it seems that this trend may not continue in 2017. On the other hand, while the stock prices of other home appliance companies such as Gree, Midea, Haier, and Robam Electric Appliances have soared, Sichuan Changhong is still hovering in the range of 3 or 4 yuan. At a time when value investment is popular, the capital market is so cold to it. Combined with the above analysis, there must be a reason. It is a pity that the former blue chip stocks have fallen to this situation. Of course, in recent years, Changhong has successively launched the CHiQ series of TVs, refrigerators, air conditioners and other products, and has a strong desire for change. Although it has not been able to reproduce its former glory, at least it has not deviated from the market trend, which can be regarded as retaining a glimmer of hope for revival in the future.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.